Underwriting Considerations for U.S. Life Insurance Producers Working with Foreign Clients
My phone rings a lot more these days with U.S. life insurance professionals calling and saying, “I’ve got an opportunity to work with a foreign client. What do I need to know?”
Just a couple of years ago, this rarely happened.
For years, high net worth foreigners wanted little to do with the United States. Sure, they enjoyed vacationing in the U.S. and sending their children to American schools but did not want to be connected to or tied to the U.S. tax system. These wealthy foreigners didn’t want the U.S. government to know their business so purchasing products from U.S. insurers and, for the most part, from the foreign subsidiaries of those insurers was out of the question.
What these people did want was U.S.-style life insurance products issued in the U.S. Dollar but only if the products were issued outside the U.S. from a stable and well-regulated place like Bermuda or Grand Cayman.
Fast forward twenty years and the implementation of the Common Reporting Standard (“CRS”), demanding the sharing of financial information between over a hundred countries has many wealthy individuals looking toward the U.S. where the Foreign Account Tax Compliance Act (“FATCA”), and not CRS, applies. While the U.S. has moderately high taxes, the tax system and tax policy is well established, making the U.S. more attractive than many jurisdictions where the government’s knowledge of one’s wealth can be a personal safety concern.
This migration (and attraction) to the U.S. financial systems means that U.S. life insurance producers are faced with an increasing number of opportunities to provide solutions to these high net worth foreigners.
….so what do these producers need to know?
Reinsurance – The Elephant in the Room but Behind the Curtain
Lisa Mangold is an insurance broker in Dallas working with a resident of China seeking to buy a U.S. policy to be owned by an irrevocable trust in Texas as part of a pre-immigration plan. Lisa is caught off guard to hear from the insurance company that its reinsurer would be making the underwriting decision on the offer. Usually, with her U.S. clients, U.S. insurers handle the entire new business process and a reinsurer is only involved if the amount of death benefit needed exceeds the carrier’s ability to make a decision.
When working with non-U.S. clients, it is important U.S. life insurance producers understand the differences in underwriting, including capacity and pricing. Unlike with U.S. clients, reinsurers, more than the frontline carriers, are calling the shots.
It makes sense that life insurance clients from different jurisdictions are not assessed the same for underwriting purposes when it comes to assigning the amount of death benefit risk (“risk”) and the cost for that risk. In a mature life insurance market like the United States, carriers retain much of the risk they offer clients, leading to an extremely competitive and client-friendly environment. Compared to other countries, this typically results in lower costs of insurance and liberal amounts of risk offered.
Outside of the United States, carriers retain much smaller amounts of the risk, ceding the bulk of the risk to one or more reinsurers. The more risk a reinsurer is responsible for financially, the more likely the reinsurer will either serve as the underwriter or exert stringent underwriting requirements on the front-line carrier. If there is more than one reinsurer providing risk to a carrier’s clients, one reinsurer will serve as the ‘lead reinsurer' who controls or influences the underwriting process and binds the other reinsurers to an underwriting offer.
For example, a large U.S. mutual life insurance company states it can offer up to USD 50m in risk to an individual client in the U.S. using its own retention. Above the USD 50m, the carrier may be able to automatically (without asking) obtain another USD 20m from a reinsurer. Above that amount, the carrier needs to seek approval from its reinsurers to obtain more risk from them.
If a carrier is using its own retention, it has some freedom to be competitive against other carriers and dictate flexible underwriting classifications and insurance costs. Over time, this practice has led to profitability challenges for U.S. carriers and forced some insurers to raise their insurance costs for in-force policies.
If that same large U.S. mutual company elects to serve clients outside of the United States in a “Foreign National Program”, the carrier’s ability to control the underwriting process and to apply its U.S. guidelines can dramatically change….and this has a lot to do with reinsurance arrangements.
Reinsurers tend to be stringent in their treaties with front-line carriers so once a reinsurer is involved in the offer at risk, insurance costs and underwriting assessments will be less flexible (or, some might argue, more realistic absent the front-line carrier competition).
In the example with producer Lisa Mangrove, it may be that the carrier retained just a small amount of the risk for a resident of China, leaving the reinsurer on the hook for most of the risk. It would not be unusual for the reinsurer’s treaty with the carrier to require the reinsurer to make the underwriting assessment.
Foreign National (umm…sometimes not really) Programs
Let’s take a moment to look at these Foreign National Programs popping up at many U.S. insurers. It is welcoming to see U.S. insurers dedicating resources to these programs but some require so many ties to the United States in terms of residence, real estate, bank account, green card, etc., that the program is not really a special offering for foreigners. Rather, it is a way for the carrier to apply its customary U.S. underwriting and capacity (with a few restrictions) to these clients. This means the reinsurers backing the carriers are likely assigning these clients to their risk pools for the U.S. and permitting coverage under their U.S. treaties.
What if the client is truly foreign to the United States and the same carrier wishes to offer coverage—either from the U.S. or a subsidiary established in another jurisdiction like Bermuda or Grand Cayman? This is where, from the perspective of a client and a life insurance producer, that requirements, capacity and costs are not as black-and-white.
These clients will be assigned to a reinsurer’s risk pool or pools outside of its U.S. pool and, as a result, be covered by a different treaty between the carrier and the reinsurer.
Where the carrier offered up to USD 50m of risk using its own retention for its U.S. clients, it will have a more conservative view of its foreign national capabilities since it has less experience (historical data) to draw upon compared to reinsurers.
The carrier might be willing to offer up to USD 20m of risk to clients meeting conditions under which the carrier feels most comfortable assessing. Under other conditions, perhaps evaluating a jurisdiction of residence where the insurer has little experience, the carrier might not offer any of its own retention and cede all the risk to reinsurance.
There are other configurations of offering risk the carrier may agree to with its reinsurers, including a share of the risk for a certain amount. The carrier could agree to use its retention for the first USD 10m of risk, share the next USD 20m with the reinsurer 50/50 and then cede all risk above that amount to reinsurance.
In the foreign national market, reinsurers want to see the carrier offering some retention, so the carrier has some ‘skin in the game’ and the financial responsibility that entails. Additionally, reinsurers do not want to be left out of offering risk on a case as this opens the door to ‘adverse selection’ where carriers are cherry picking clients with the best underwriting conditions.
Regardless of the arrangements between the carrier and its reinsurers for its foreign risks, reinsurers are almost certainly going to be influencing or controlling the entire process since they are not only accepting more of the risk but have more historical data upon from which to draw.
Underwriting Guidelines* (*subject to change completely)
What does this mean for the life insurance producer trying to navigate the underwriting process for these risks? For starters, having the same clearly defined set of underwriting guidelines the producer is used to for U.S. clients is likely unavailable. Instead, a carrier may offer a general guideline based upon residence of jurisdiction and the usual underwriting considerations of amount of risk, age, sex and health.
This permits a carrier to at least publish a chart of countries of client residence with categories of amounts of risks and the underwriting requirements corresponding to those amounts of risk. Then, there are usually a lot of asterisks which leaves the door open for the carrier to mention that these guidelines are just that—a guide—and the actual underwriting offer made can differ based on a client’s specific situation.
Starting in the 1990s, reinsurers began to assign country codes to every country to be used as a baseline in assigning the cost of death benefit. More-or-less, the “A”, “B”, “C” and “D: letter assignments range from the best assignment of cost (no ‘flat extra’ cost) for “A” countries, such as the U.S., Singapore and the U.K., to ‘declining to offer risk’ for “D” jurisdictions like OFAC countries. It is not necessarily transparent why a reinsurer has assigned a country code but an assessment typically includes evaluating mortality, crime, healthcare, type of government, historical data on risks written, appetite for more risk from a jurisdiction, etc.
Monica, 60, is a wealthy retiree who considers herself a resident of Australia but now spends about five months a year in Fiji. She is considering buying a policy from an insurer who views Australia as an “A” risk but because she spends so much time in Fiji (more than three months), the reinsurance treaty the carrier has requires Monica to be underwritten as if she resides in Fiji. Monica is astonished to learn that this carrier considers Fiji to be a “C” risk.
It never surprises me when a life insurance producer asks me why a seemingly first-world country does not have an “A” country code assigned to it. It may be that the country ticks all the boxes when comparing it to the United States or other “A” countries except in one important area---immediate access to level one trauma care. For instance, if someone falls and hits their head in a place where reaching medical care (or urgent medical care) takes a long time, the risk of mortality goes up. Underwriting is going to take this into account.
“Rich People Know How to Party, Too.” – Johnny Van Zant, Musician
Most of my career has been spent working with high net worth and ultra, high net worth clients outside of the United States. In the United States, it is safe to say that wealthy clients tend to take better care of themselves, seek regular medical care and are considered ‘good’ risks for carriers and reinsurers. Producer groups like M Financial and Lion Street have enough underwriting experience with these clients to support such favorable assessments and rightfully obtain capacity and pricing based on this data from carriers for their clients.
However, this logic does not necessarily translate to wealthy clients in other jurisdictions.
Anika, 54, is a non-resident Indian (“NRI”) who resides in Dubai in the UAE and owns four car dealerships. The UAE is considered an “A” risk country but, after reviewing some preliminary client information, Anika is asked to undergo a more intensive battery of medical tests.
In India, residents are accustomed to a plant-based diet so their circulatory systems, including artery size are used to transporting less fats. It is common for wealthy Indians who reside in the UAE and other first-world jurisdictions, to adopt western diets rich in meat and fat and to consume more alcohol. This leads to high incidents of obesity, diabetes, heart disease and early mortality.
According to Canty and Associates LLC, a global aggregator of geographical data, the 2019 estimated life expectancy for a resident of India is 70.84 years (female) and 68.12 years (men). Mortality is lessened approximately five years for high net worth and ultra, high net worth NRIs in the UAE. This means the underwriting process is going to take this data into account and look at things like if the client has a heart condition, is the client treating the condition? If the client is pre-disposed to a heart condition, is the client taking a cholesterol drug as preventative measure?
Gael, 48, resides outside of São Paulo, Brazil where he owns hundreds of thousands of acres of land. Gael is in good health and São Paulo is considered an “A” area within Brazil (where some of the country is considered a “B” risk) so Gael is surprised at some additional information he must give to satisfy the life insurance underwriter.
According to the Inter-American Commission on Human Rights, half the land in Brazil is owned by about 1% of the population. Given such vast amounts of land an owner would need to oversee, it is not uncommon for a wealthy prospective life insurance client from Brazil to own one or more helicopters—often ‘bubble’ helicopters (think M.A.S.H.). A U.S. life insurance producer is familiar with an aviation questionnaire and this situation may be similar; albeit, more comprehensive.
In addition to knowing if the client is the pilot or being piloted and gathering information about all of the pilots (training, flight hours, types of craft), information on the helicopters, including type, age, maintenance records, how they are stored (covered or uncovered) will be important in the underwriting assessment. A client who is flown around his property once a quarter by a pilot may be viewed more favorably than a client who flies himself around more frequently—especially, if the helicopter is older and has undergone more frequent maintenance than common.
Practice Makes Perfect
As anyone with the slightest experience in working with international clients, particularly wealthy ones, will know, the nuances of obtaining life insurance capacity are seemingly endless. As time goes on and insurers and reinsurers write more clients and gather more data, guidelines will become more concrete.
Until then, life insurance producers should be proactive when considering a carrier for a client and not only ask the underwriter at the carrier about anything special (requirements, questions to ask, solicitation rules, etc.) relating to the client’s situation and jurisdiction of residence but also insist the carrier consult the underwriter at the lead reinsurer for updated feedback. A carrier may see a client from a jurisdiction once or twice a year where a reinsurer will have more volume and current information.
The main lesson: keep the questions coming! If a producer can master split-dollar planning, executive benefit funding and complex wealth structuring, the producer can excel at providing solutions for foreign clients.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.